Each summer, the Social Security Board of Trustees, a six-member panel who serve the federal government by offering a short-term and long-range forecast on the health of the Social Security program, release their annual report. Last week, the much-anticipated 2017 report was released -- and as expected, it was mostly bad news.
It's no secret to most Americans that Social Security isn't in the best of health. As last year's report showed, we were less than two decades away from a major change. By 2034, according to the 2016 report, the program was expected to have exhausted its more than $2.8 trillion in spare cash, leaving seniors to face what could be an across-the-board cut in benefits of up to 21%. That's not a pretty picture when more than 3 in 5 seniors are relying on the program for at least half of their monthly income, according to the Social Security Administration.
Let's take a look at the biggest updates in the newest trustees report.
If there is good news to report, it's that the date at which the program will begin paying out more in benefits than it's generating in revenue each year has been pushed a bit further down the road. The 2016 report had called for this change to begin in 2020. However, the newly released report estimates that Social Security will be cash flow positive through 2021. This new expectation suggests that the trust's spare cash, which is primarily invested in special issue bonds, and to a smaller extent certificates of indebtedness, could reach $3 trillion by 2022 before it begins to decline. If the Federal Reserve sticks with its monetary tightening policy, we could see extra money generated for Social Security via higher interest rates on newly issued bonds. In 2015, interest on the trust's asset reserves accounted for 10.1% ($92.9 billion) of its revenue.
Also, the Disability Insurance (DI) Trust's depletion date was pushed out a bit further, from 2023 in last year's report to 2028 in this year's report. The trustees list a "continuing favorable experience for DI applications and benefit awards" as the key reasons behind their pushing back the DI Trust's asset reserve depletion date.
Now for the bad news. Despite a two-year delay in the expected time when the program would begin paying out more in benefits than it's generating via payroll taxes, interest, and through the taxation of benefits, its asset reserve depletion date remains unchanged. In simpler terms, Social Security is still expected to completely exhaust its excess cash (that aforementioned $3 trillion figure) by the year 2034. Should Congress do nothing between now and 2034, benefit cuts on existing and future retirees would be a strong possibility.
Why is this reserve being exhausted in just 12 years? Due to a confluence of factors, including the ongoing retirement of baby boomers, which is pushing the worker-to-beneficiary ratio lower. Essentially, there aren't enough new workers, and in turn payroll tax revenue being generated by these new workers, to cover the benefits being paid to all the boomers entering retirement. Of course, it's not just the boomers who are to blame. Lengthening life expectancies that allow seniors to pull a benefit for a longer period of time are playing a role, as are the rich, who tend to live notably longer than the poor and are able to thus pull in a large Social Security check over the long run.
Now for the really ugly stuff. Not only has the asset reserve depletion date not changed, but the percentage cut to benefits needed to sustain the program over the next 75 years (through 2091) has gotten steeper. What was predicted to be a 21% across-the-board benefits cut in last year's report is now forecast to be a 23% benefits cut by 2034. Likewise, the long-term (75-year) cash shortfall for the program jumped by roughly $1.2 trillion to $12.5 trillion. With the average retired worker receiving $1,367.58 a month as of the May snapshot from the Social Security Administration, a 23% cut would wind up yielding a monthly benefit of just $1,053.04, in 2017 dollars. This would put the average senior less than $1,000 above the federal poverty level for full-year income in 2017, if Social Security were their only source of income and a 23% cut were implemented.
Making matters worse, the actuarial deficit in this year's report vaulted higher by 17 basis points to 2.83%. In simple terms, the actuarial deficit is the amount the trustees estimate the payroll tax needs to be increased by today in order to bridge the budgetary shortfall over the next 75 years. The longer Congress waits to act, typically the higher the actuarial deficit gets.
Currently, Social Security's payroll tax is 12.4% on earned income between $0.01 and $127,200 (any income above $127,200 is free and clear of the payroll tax). Most workers wind up paying just 6.2%, because their employer picks up the other half of the tab. The trustees' figures suggest that instead of remaining at 12.4%, the payroll tax should be raised to 15.23% (an extra 2.83%) today in order to resolve the projected 75-year cash shortfall and keep benefits growing at a fairly consistent pace, as they are now. This would, in theory, mean about a 1.415% increase in payroll for the average working American, and a full 2.83% increase for the self-employed.
America, this is your wake-up call
These figures are pretty grim if you are, or expect to be, reliant on Social Security income during retirement. If you still have years or decades left before you plan to retire, let these figures serve as a warning that Social Security was never designed to be a primary income tool in retirement. The average working American, per the Social Security Administration, should expect to replace only about 40% of their income with the program. If you're years or decades from retirement, formulate a budget, stick to it, invest your money wisely, and reduce your reliance on a program that could see a pretty sharp cut in benefits in less than two decades' time.